PI - Impinj: The Growth Story Takes A Major Hit

2023-07-31 07:50:51 ET

Summary

• Impinj is touted for its fast growth and it is priced accordingly, but recent developments have shaken confidence in this belief.
• The latest guidance sees the top and the bottom line dropping due to inventories and soft demand, which runs counter to the perception of PI as a growth story.
• While the stock price has been cut in half in three months, there are several reasons why the bottom may not yet be in.
• PI still has potential and a short-term bounce is possible, but PI needs to get back to growth or it is a long way down.

Shares of Impinj ( PI ), a provider of RFID hardware and software solutions, have struggled ever since soft Q2 guidance in late April raised doubts about PI as a growth story, which was further amplified by a disappointing outlook at the most recent Investor Day on June 13. The latter snuffed out an attempted comeback after the big collapse in the stock on April 27. Still, both could have been forgiven if the Q2 report managed to hit the ball out of the park, but it instead suggested PI may be in for some lean times. Why will be covered next.

The Q2 report falls short of expectations

A previous article from March ended by saying that "the stock could continue to rise as long as the numbers don't disappoint, but if they somehow do, watch out below." This turned out to be very prescient because the stock has since lost more than half its value after multiples selloffs due to PI falling short of expectations. Not only was guidance weak, but PI mentioned customer delays and weak retail demand, which further raised doubts as to whether PI is really the growth story it is touted to be.

The retreat in the stock included a 39% drop on April 27 after Q2 guidance was not as good as hoped for. It also marked a change from what PI had done in the last three years, and the preceding 12 months in particular, which had resulted in PI multiplying in value. There was some hope PI might have some upside, but as it turned out, the Q2 report on July 26 was in several ways a repeat of the Q1 report. For instance, both showed strong YoY gains in the top and the bottom line, in line with PI's calling as a growth story due to the huge potential of the RFID market.

In Q2, revenue increased by 43.8% YoY to $86M, although by only 0.1% QoQ. PI finished with a GAAP loss of $8.1M or $0.30 per share and a non-GAAP profit of $0.33 per share, which is an increase of 230% YoY. Adjusted EBITDA was $9.96M in Q2 FY2023, up from $8.62M in Q1 FY2023 and $3.85M in Q2 FY2022. The table below shows the numbers for Q2 FY2023.

Source: PI Form 8-K

PI finished Q2 with cash, cash equivalents and investments of $114.9M, down from $183.7M a year ago. Cash used by operating activities was $22.5M and free cash flow was negative $28.2M. In addition, PI paid $23.4M for the Voyantic acquisition in April. PI is bleeding cash, but it should get some relief after it was awarded $18.5M by a federal jury after it determined in July that NXP Semiconductors ( NXPI ) had infringed on two of its patents.

However, the Q2 and Q1 report were also similar in terms of missing consensus estimates by a mile. Consensus estimates were expecting non-GAAP EPS of $0.38 on revenue of $88.1M, but Q3 guidance calls for PI to post a non-GAAP loss of $0.06-0.12 on revenue of $63-66M. The table below shows how the numbers are expected to deteriorate in Q3 FY2023.

The latest forecast marks a sharp turn from the fast growth the market had gotten accustomed to seeing from PI. PI attributed the downturn to excess inventories, but there's also weak demand among some end-users. From the Q2 earnings call:

Looking to the third quarter, we expect a sequential decline in endpoint IC revenue, driven by inlay-partner safety-stock reductions and weak retail apparel demand more than offsetting growth from our platform wins."

A transcript of the Q2 FY2023 earnings call can be found here .

Note that PI expects IC endpoint revenue to decline sequentially in Q3, which stands in contrast to PI's previous statement at the Q1 earnings call that Q3 revenue would increase sequentially.

So, accordingly, we expect endpoint IC revenue to grow sequentially in Q3 and then again in Q4, so different than historical seasonality."

While guidance did not extend beyond Q3, management believes the destocking of inventories is likely to last into Q4. Furthermore, while PI remains upbeat about long-term prospects, management has begun tightening the belt by cutting expenses, which suggests PI is open to the possibility that revenue growth may be harder to come by for some time.

Could Impinj go lower?

The chart below shows how the stock lost 12% on July 27 after the Q2 report was released. The stock fell by double digits even though it came on the back end of a long slide that started on April 27 following the collapse in the stock after the Q1 report. The stock attempted a recovery in May and June, but the slide resumed following the 2023 Investor Day presentation on June 13.

At the event, PI presented the latest long-term revenue models in the $500-750M range, non-GAAP gross margin in the 55-57% range and adjusted EBITDA in the 19-25% range. In comparison, revenue was $257.8M, non-GAAP gross margin was 55.5% and adjusted EBITDA margin was 11.2% in FY2022. Judging by the post-presentation selloff, the market was disappointed in these numbers.

However, PI is now deep into oversold territory with an RSI value of 22 after losing more than half its market cap since late April, which suggests a bounce is likely in the short term. Still, it is possible the stock has yet to hit bottom after closing at $67.20 on July 28.

If we assume the recent fall in the stock is part of a retracement of the uptrend that started in March 2020 with a low of $11.47 and which ended three years later on March 2023 with a high of $144.90, then the stock is currently between the 50% Fibonacci retracement level at $78.19 and the 61.8% Fibonacci retracement level at $62.44.

In other words, the stock has room to go lower before a potential support level is there to halt the slide. Note that the stock got as low as $80.10 in late April before rebounding and the stock got as low as $78.11 on July 26. There seems to have been some support in the $70-80 region, which corresponds to the 50% Fibonacci retracement level at $78.19, before the stock dropped to a new low after the Q2 report.

Valuations may also support lower stock prices. The stock price may have been cut in half in the last three months, but multiples are still in the triple digit range. For instance, PI trades at 142.5 forward non-GAAP earnings and with an enterprise value of $2B, PI trades at 132 times forward EBITDA. Such high multiples could be justified when PI was growing by leaps and bounds, but not so much if the latest guidance is all that can be expected from PI in terms of growth. PI needs to pick it up and return to growth soon with multiples where they are, or the stock could go a lot lower.

Source: Seeking Alpha

Another factor supporting lower stock prices is that shorts continue to remain interested in PI. Short interest stood at 3,323K on April 14 according to the Nasdaq , before the stock started to sell off, and it remained basically unchanged at 3,305K on July 14, despite the drop in the stock price. This translates to a short float of 13%.

It's also worth mentioning that PI stands to be affected by weakness in consumer spending. There are signs macro issues are starting to have an impact on the average consumer and businesses may be responding by pulling back on what are deemed non-essential investments. This may be why PI is experiencing delays with its customers and weak retail demand. It could also be the reason why a return to the ultra-fast growth of recent quarters may be too much to ask for in the near future.

Investor takeaways

It should be noted that PI still retains a lot of potential for future growth. The need for RFID is still there. None of its major customers have expressed any dissatisfaction with PI. They may have delayed the rollout of RFID solutions, but a resumption is to be expected until they say otherwise. If that happens or if PI manages to snag another major customer, growth could very well accelerate once again. Shorts could get burned if that happens.

However, I remain neutral on PI. The sharp deceleration in growth should raise concern. It doesn't help that PI had to go back on what it said earlier. First, it said Q3 revenue would grow sequentially, only to turn around three months later with guidance that calls for Q3 revenue to contract sequentially. It suggests that PI is being confronted with headwinds that it was not prepared for. It certainly does not inspire confidence.

Multiples are still in lofty territory despite the stock price being cut in half in the last three months. PI is not truly profitable, at least as far as GAAP is concerned, and while the balance sheet may not be in immediate danger, it does leave open the possibility PI may need a capital raise, especially if Q3 turns out to be not a speed bump, but the start of a new normal.

The charts suggest the stock may not yet have hit bottom, even though a bounce is likely in the short term. The stock has rallied by so much in the last three years that there is room to go lower, especially if PI continues to disappoint like it has on multiple occasions in the last three months, including the last two earnings reports.

PI is primarily bought for its growth potential, but the growth story has been shaken in the last few months. PI needs to show the growth story remains alive and well. Everything else can be forgiven as long as PI grows fast enough. Whether it is being in the red, shares being diluted or cash being drained, all that and other ills can be set aside, provided growth is there.

Bottom line, while some may want to roll the dice by betting on a resumption in growth in the near future, others may want to play it safe by staying on the sidelines. If growth resumes in short order, PI could easily recover some of its recent losses. But if growth remains AWOL, and Q3 guidance turns out to be the first of many, PI could remind everyone why stocks take the stairs on the way up and the elevator on the way down.

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